Big oil’s electric dreams could create new energy cartels

Oil companies want to become power utilities to meet rising
demand from electricity in transport and from growing populations. The strategy
makes sense, but would also bring risks for regulators and consumers if it were
to create a new breed of gigantic energy-controlling monopolies.

On one hand, watchdogs in developed markets such as the UK should welcome the introduction of relatively new players like Shell and BP to challenge the Big Six conventional utilities. On the other, electricity markets are politically sensitive and oil majors would make easy targets for politicians keen to be seen protecting consumers if profits are put too far ahead of the public good.

The Labour Party has threatened to nationalize parts of the electricity industry if it gains power in Britain. Meanwhile, regulator Ofgem was forced last year to introduce price caps to reduce household energy costs in response to political pressure. Introducing big oil into the debate could fan the flames.

There is also the question of shareholder value for oil
industry leaders to consider. Can Shell and other international oil majors
afford to increase spending in their embryonic electricity businesses and still
maintain adequate levels of expenditure on their conventional oil and gas
divisions, which remain the main drivers of profits and investor returns?

The decline in capital expenditure in new oil production has
been flagged as a major concern for policymakers seeking stable crude prices.
The world could require at least another 30 million barrels per day of new
crude capacity by 2040 to meet demand, replace ageing reservoirs and keep
prices affordable. Diverting capital into electricity markets could be a
distraction.

Despite these concerns, international oil companies such as Shell are ramping up their investments in electricity. The largest international oil major in Europe expects the market for power to be the fastest growing area of the energy industry as pressure builds to cut global pollution and carbon emissions, according to a recent Bloomberg television interview by Shell executive committee member Maarten Wetselaar.

“We believe we can be the largest electricity power company
in the world in the early 2030s, because this part of the energy system is
going to be the thing that grows fastest,” said Wetselaar, who also heads up
Shell’s gas and new energies division.

Wetselaar’s vision is understandable given the rapid growth
in electric vehicles (EVs). S&P Global Platts Analytics forecasts that
plug-in EVs – including rechargeable hybrids – will account for nearly half of
global auto sales by 2040, displacing some oil demand as a transport fuel and
expanding the role of the electricity sector.

Shell has said it plans to avoid investing in conventional
transmission and power station assets to focus instead on distributed
renewables and supply, making its goal to become number one in the power sector
a complex and risky bet on emerging technologies and markets. The company
beefed up its UK electricity supply business by buying First Utility in late
2017. It has since struggled to compete with cheaper start-ups in a fiercely
competitive market that has seen a slew of supplier bankruptcies in recent
months.

Energy majors in new battleground

To become the world’s biggest renewable generator, meanwhile,
would require an annual expenditure in the region of $2 billion initially,
according to a report by S&P Global Platts. By comparison, Spain’s
Iberdrola – a European sector leader – ploughed over $5 billion into green
power generation growth last year.

Iberdrola has 29 GW of renewable electricity capacity
installed worldwide. Shell has 1.6 GW of solar and will have 5 GW of wind on
completion of committed investments. And Shell isn’t alone in wanting to forge
into these new markets. BP claims it is now generating enough power from wind
renewables to feed 400,000 homes.

Meanwhile, some international oil companies are being even more aggressive, posing a direct challenge to incumbent conventional utilities in their domestic markets. In France, Total recently acquired Direct Energie. The deal pits it against the state-owned market giant EDF. By 2022, Total aims to be supplying electricity to 6 million customers in France and 1 million in Belgium.

However, utilities can’t match the financial muscle of big
oil. NextEra Energy, the world’s biggest renewable generator in the US, had a
turnover of around $17 billion last year, which is less than Shell made in
actual profits over the same period. Gobbling up rivals in the power sector is
relatively cheap when armed with an oil company’s gigantic balance sheet.

Globally, it’s not just international oil majors going
electric. State-owned fossil fuel producers are increasingly looking at the
sector for growth. Saudi policymakers have for the last decade harboured dreams
of the kingdom being the biggest exporter of solar-generated electricity in
addition to crude oil. Elsewhere in the oil-rich Gulf, petrodollar sheikhdoms
are pumping billions into renewables.

US oil companies are also coming under more pressure to
diversify. Rising star US Congresswoman Alexandria Ocasio-Cortez has America’s
most powerful business lobby in her sights. Ocasio-Cortez wants 100% of the
country’s power to come from renewables and fossil fuels to be phased out in
the world’s biggest economy, in just a decade.

In its defence, big oil is stressing that EVs are no magic bullet for climate change and won’t spell the end of petroleum. EVs still account for a small share of the total global passenger vehicle fleet. Global sales of light duty plug-in EVs saw double-digit year-on-year growth in January, but still only totalled 155,000 units, according to the latest S&P Global Platts Analytics monthly report.

Of course, declines in consumption by motorists will be compensated by growth in petrochemicals and industrial transport like shipping. Rapidly growing developing economies in Asia will also increasingly play a more important role in supporting crude demand. In tilting from hydrocarbons to electrons, oil companies will have to find a balance between serving their fossil fuel past while investing in their electric future.

AUTHOR BIO

Andrew Critchlow,
Head of news, EMEA

Andy Critchlow is head of news in EMEA for S&P Global Platts. He has 20 years' experience writing about oil and gas, mainly in the Middle East. Previously, Andy held senior editorial positions at Reuters, the Wall Street Journal and Bloomberg. He holds a Master's degree in Middle East politics from Durham University.